The Effect of Value Estimation Errors on Portfolio Growth Rates
17 Pages Posted: 13 May 2008 Last revised: 10 Jan 2011
Date Written: November 8, 2008
This paper analyzes the impact of value estimation errors on portfolios' growth rates and relative growth rates (i.e. long-term returns and long-term relative returns) for several portfolio weighting methods. The portfolio weighting methods include capitalization weights, estimation error neutral weights, estimation error independent weights, Funda-mental weights, and Diversity weights. The paper provides theoretical support, in the context of estimation error, for the empirical findings that many non-capitalization weighted portfolios beat the market's capitalization weights. It also provides a theory for the size effect.
Keywords: portfolio growth rate, estimation error
JEL Classification: G11
Suggested Citation: Suggested Citation